Ryan Avent:
Monetary policy: Try overshooting for once, cont. | The Economist: What we have here is a chart of 10-year breakevens over time.... And what I've done here is illustrate the Fed's reactions to big downward moves in expected inflation; the Fed has been an active deflation fighter. You'll note, however, that in the aftermath of Fed interventions, expected inflation coasts up toward the long-term level, of about 2.3%, then inevitably slides down again.
The explanation for this dynamic, as I see it, is that the market thinks the Fed will push inflation up to 2% but no further, and the Fed has not tried to convince the market otherwise. And so what we observe is a cap on the rate of recovery. Will America get QE3? If inflation looks like falling to 2% and below. But it won't get a faster pace of employment growth unless the Fed signals that inflation at 3% or more for a year or two would be acceptable.
